Air India’s disinvestment, first attempted by the Atal Bihari Vajpayee government, is being revived. The sale bid the last time was a flop, shelved prematurely after all the bidders were either disqualified or dropped out. The many factors that were and may still be at work against the sale are not widely understood. Unless overcome, they may again endanger the sale.
In May 2000, bids were invited for a 40% stake in Air India, with a cap of 26% on foreign investment. The airline had reported losses for six straight years, had $70 million debt on its books and was fast losing traffic. More than 18,000 workers were on its rolls for a fleet of just about two dozen planes. Its employee-aircraft ratio, 750, was among the worst. Singapore Airlines, in contrast, had 91 employees per aircraft. Inefficiency, typical in a government-controlled set up, was bleeding Air India. Yet, the quantum of stake on offer made it clear that the government intended to retain a crucial stake, appoint its own directors and continue to have a say in running the business. Put off by the substantial degree of control the government wanted to retain in the airline after the disinvestment, several potential bidders stayed away from the sale, including, possibly the worthiest contender. Plus, in a sale carried out through competitive bidding, reduced interest can impact the valuation.
Doomed from start
The sale’s stated purpose was to bring on board a strategic partner who would turn around Air India. But the sale’s rules were loaded against candidates with a proven track record — foreign airlines. Lufthansa, Swissair, Emirates, British Airways and Air France-Delta in combination were among those to have expressed interest formally in buying the stake. However, a bidding rule that required foreign airlines to team up with a local partner forced them to opt out. Singapore Airlines, which had also expressed interest formally, roped in the Tatas to proceed with its bid.
Those who remained in the fray had their expressions of interest evaluated; those ineligible were disqualified. In the end, the contest was down to two bidders — the Hinduja group and the Singapore Airlines-Tata joint venture. Both were invited to inspect Air India’s books. The Hindujas’ bid was already under fire from the Opposition over allegations related to the Bofors arms scandal. After studying Air India’s financial records, the group presented to the government a whole set of conditions on management control, threatening to withdraw if these were not met. The government barred the Hindujas from pursuing its bid, leaving a sole bidder: the Singapore Airlines-Tatas combine.
Private airline owners who had so far orchestrated resistance to the sale from the background, now openly pointed out that the majority stakeholder in Singapore Airlines was a foreign government. The unmasked attack made Singapore Airlines pull out. The airline said in a statement that the intensity of opposition to the privatisation from political groups and the trade unions had surprised it and that in such an adverse climate, it was not confident it could play a useful role.
The then Disinvestment Minister, Arun Shourie, clarified that the Tata group, Air India’s erstwhile owner before its nationalisation in 1953, could proceed with its bid without a partner. But the Tatas too withdrew, forcing the government to abort the disinvestment.
If the government was eager to retain its hold over Air India, the private airline owners were anxious that foreign airlines should not gain control over it. Both the motives succeeded. The back story of how the mood against foreign airlines was whipped up was retold at a public meeting by Mr. Shourie. A Delhi-based chamber of commerce wrote to the Prime Minister lobbying against foreign investors being allowed to acquire more than 25% stake in Air India, as this was the rule in the U.S., China, Thailand and Mexico. Senior parliamentarians had sent similarly-worded recommendations. The comparison sought to be drawn was unfair. Under Indian law, investors owning fewer than 26% shares cannot move special resolutions, a restriction that did not apply in the countries the letters cited. After the sale was scrapped, private airlines flourished. Although Air India’s fleet — which includes its subsidiaries — has now grown to around 150 aircraft, it has lost traffic and market leadership to competition.
A level playing field
If the mistakes of the past are a guide, the sale’s purpose should guide the sale’s rules. Air India’s debt, now about $8 billion, is growing unsustainably. It was bailed out with $5.8 billion of taxpayer money in 2012. The sale’s purpose should be to compensate taxpayers for shouldering the burden of keeping the national carrier afloat. Air India’s disinvestment could deliver this if it results in reduced government interference and increased competition. Remember, most taxpayers are also flyers.
Competition in the air travel market will not increase if Air India gets acquired by a private airline in India. The rules should provide foreign airlines a level playing field. Sharp scrutiny of objections can expose and thwart hidden vested interests.
Selling only a part of the government’s holding will not free Air India of the ills of public ownership. The government will have to exit the airline cleanly and completely. The reform demands political courage, economic wisdom and business-like shrewdness.
Puja Mehra is a Delhi-based journalist
